Americans are not saving enough for retirement. A
Certainly, inflation has contributed to these outcomes because employees have less
There is also inequity in the current system. According to research by the National Institute on Retirement Security (
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SECURE 2.0 Act of 2022
This is the backdrop to new legislation passed in December 2022 aimed at enhancing retirement plan availability and effectiveness. The SECURE 2.0 Act of 2022 (SECURE 2.0) includes important provisions affecting
How SECURE 2.0 helps employers
SECURE 2.0 tries to remove some of the burdens on employers that exist today. For instance, the Act requires the US Department of Labor and the Treasury Department (the government entities that regulate retirement plans) work together to make it simpler for employers to operate a plan. In the past, there has been a myriad of notices that are required to be distributed to employees. One of the provisions allows employers to only send those notices to employees who are participating in the retirement plan, not to every employee. This makes it easier and less expensive for employers to comply.
Changes like this make setting up and administering a retirement plan more attractive to small businesses. Currently, employers with fewer than 100 employees may be eligible for a three-year start-up tax credit of up to 50% of administrative costs, with an annual limit of $5,000. SECURE 2.0 increases this credit to 100% of qualified start-up costs for employers with up to 50 employees. This credit remains at 50% for employers with between 51 and 100 employees. This tax credit is essentially an offset against the tax liability for the business, so the credit is more valuable than a deduction. For smaller businesses – those with fewer than 50 employees – the credit might cover all administrative costs for the first three years.
New for 2023, employers may be eligible for an additional credit of up to $1,000 for each employee who earns less than $100,000 for employer contributions. The credit is available to employers with up to 50 employees at 100% for the first two years, 75% in year three, 50% in year four, and 25% in year five. The percentage phases out from 51 to 100 employees. This means that employers can provide a matching contribution to their employees, and the federal government will provide a tax credit of up to 100% of the contribution.
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How SECURE 2.0 helps employees
One of the biggest obstacles to participation in employer-sponsored retirement plans is inertia, the tendency to stay on a certain path. Employees understand the benefits of saving but for multiple reasons never sign up. SECURE 2.0 aims to change this dynamic by requiring automatic enrollment. Beginning in 2025, employers who start new retirement plans will be required to automatically enroll employees in their retirement plan at a rate of at least 3%, but not more than 10% of eligible wages. New companies (in business for less than three years) and employers with 10 or fewer workers are excluded from this requirement. Employees may opt out, but automatic enrollment tends to be effective because a small amount is being subtracted pre-tax from their pay without any action on their part.
Another exciting provision in SECURE 2.0 enables student loan payments to be treated as retirement contributions for the purpose of qualifying for matching contributions. This means that employees who are unable to contribute to their retirement savings due to student loan debt will still reap the benefit of employer matching contributions. This new provision begins in 2024 and is optional for employers. Employers will be able to rely on employee self-attestations as to qualifying student loan payments, such as a signed statement setting forth their total student loan payments for the year.
Many workers hesitate to contribute to retirement plans because they want easy access to money in case of an emergency. A November 2022 poll by SecureSave found that
SECURE 2.0 offers two provisions to help address this concern. The first option allows emergency savings accounts to be linked to retirement plans beginning in 2024 so that employees can save for and access emergency funds from their retirement account. This is a separate account within the retirement plan specifically for emergency savings that would be available to non-highly compensated employees only, with contributions made on a Roth (after-tax) basis. Employee contributions to an emergency savings account are eligible for the same matching contributions that apply for elective deferrals, although matching contributions are made to the retirement account, not the emergency savings account. Employees can be automatically enrolled in an emergency savings account, which can be funded up to $2,500 per employee. The second provision allows for an emergency withdrawal of up to $1,000 from an existing retirement savings account. Both types are not subject to an early withdrawal penalty and can be repaid to the plan so those funds can continue to grow for retirement.
If you are approaching retirement, you probably already know that at age 72 you are required to start withdrawing funds from a 401(k) or 403(b). Beginning in 2023, SECURE 2.0 will change the age for required minimum distributions (RMDs) to age 73 and then to age 75 in 2033. In addition, the penalty for not taking an RMD is reduced from the current 50% to 25%, and in some cases to 10%. In 2024, the RMD requirement for Roth 401(k) accounts during a participant's lifetime will be eliminated altogether.
Under the new law, employers could also offer small financial incentives to employees to start contributing to a plan. Effective for plan years beginning after 2022, employers may offer modest financial incentives, such as gift cards, to increase participation. This can be a new way to incentivize employees to get started saving for retirement.
Effective immediately, SECURE 2.0 gives employers the option to permit employees to choose whether employer contributions will be made as a Roth (after-tax) contribution or as a traditional pre-tax contribution. The Roth contribution amounts would be subject to taxation when they are contributed, so employees would pay taxes currently, but those amounts could then be distributed tax-free if certain conditions are met.
The SECURE 2.0 Act has over 90 provisions, some which are effective immediately and others in 2024 and beyond. If you as an employer currently have a plan, it's important to understand the changes that are coming. If you don't have a plan – and many small businesses don't – it's a good time to start one. A solid retirement savings plan is essential to attract and retain today's workforce, and the benefits are many. As an employer, you can take advantage of tax credits that support the start-up and administration of plans and other tax incentives. Your employees can finally start saving for retirement while having flexible access to their monies and matching employer contributions even if they are paying off
